Friday, December 18, 2015

You don't need a bear market to lose money

In past 2 years what I've hated most is people telling me I should be making lot of money as market is going up since then. In fact it hasn't been that very different than my past performance. 2015 specially was quite bad for my equity investment portfolio as I am overweight some commodity companies in oil & aluminium space which had a terrible year in-spite of Nifty Sensex almost flat. That is exactly the biggest problem with general investors. When market goes up they don't participate cursing the market as gone up so much while when it comes down they wait indefinitely to catch the bottom.

You can make or lose money in any kind of market. So you don't need only a bull market to make money while even a raging bull market can make you lose a great deal of money. 

For example in a bull market you lose money if:

a. You are invested in the sector which is going down (oil, metals, psu banks in 2015)
b. You have bought puts either as hedge or speculation
c. You have sold calls of outperforming stocks which in some months went up twice or even thrice their average true range (ex. tata motors movement in october 2015 as the stock went up 30% in a month)

Similarly in a bear market you will make money if:

a. You are invested in the sector which is going up (for ex pharma & consumer stocks in 2013)
b. You have sold calls
c. You have bought puts

It's not that I am very smart and do all the right moves in all kinds of market. In fact I feel am the dumbest but i rarely deviate from my process and diversify to minimize the risk of losing too much on bad investments or trades. The objective of the above discussion is to understand that there is no right time to be in the market. There are people who make money in all bear markets while there are many who loses everything in even the best of the bull run. The key to survival is diversification and always have some gunpowder (cash) ready to fire when opportunity arise.

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